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Download This! (Int'l Edition)

May 28, 2000

International -- Int'l Cover Story

Download This! (int'l edition)

Free music on the Web has let the genie out of the bottle

Rob Thomas had the tune in his head for a long time, but it wasn't until he met his wife two years ago that he figured out the words and that it would be a love song. And when singer Thomas and his four bandmates, who make up matchbox twenty, went into a recording studio in Atlanta last August, they already had a notion that the pulsing Bent would be the first single on their second album, mad season by matchbox twenty. "I'm writing continuously," says Thomas, 28. "But Bent was just one of those that, to me, was a radio song."

Thus are hit singles born. Bent quickly became the hottest new song added to radio-station playlists when it made its debut on Apr. 12, building buzz for the release of mad season on May 23. The album follows matchbox's multiplatinum 1996 debut and also comes on the heels of Smooth, the top Grammy-winning single that Thomas co-wrote and performed on Carlos Santana's latest album.

The ephemeral formula for a hit song may never change. But Bent enters the charts at the messiest, most unnerving moment in music-biz history. Because it is so easy for digitized music to travel through airwaves or wires, music is the first realm in the entertainment sector to be truly transformed by the Internet--though everything from books to movies will confront the challenges of broadband soon enough. The obvious impact is the potential loss of sales through unofficial downloads, and lately, the headlines have been filled with tales of college students flooding their schools' high-speed computer pipes with tunes appropriated from download sites such as Napster Inc. and MP3.com Inc.

Lawsuits are flying in every direction, and MP3.com is working to settle an Apr. 28 court ruling that it violated copyrights, brought by the recording industry's trade association. Meanwhile, Napster, based in San Mateo, Calif., is battling in court with the record companies that are allied with some of their popular artists, running the gamut from Paul McCartney to hard rockers Metallica and rapper Dr Dre. Indeed, for now, all of the industry's players are mired in rearguard legal actions such as the MP3 suit (page 130), aimed at preserving the good old days, like an aging Grateful Dead fan who insists that the songs really do sound best on 8-track.

The pressure has never been greater. Moguls like Edgar Bronfman Jr. of Seagram Co. and strategists like Bertelsmann AG's Thomas Middelhoff have bet large chunks of their empires on music's future. And on May 11, the global giants that produce the vast majority of the world's recorded music--Seagram's Universal Music Group, Time Warner, Sony, Bertelsmann, and EMI Group--settled a longstanding case with the Federal Trade Commission that accused them of artificially inflating CD prices through their dealings with retailers.

Faced with the prospect of lower CD prices as a result of the settlement while at the same time tackling the spread of free downloads, it's easy to understand the majors' defensiveness. For one thing, they're behind the curve when it comes to all of the implications of digital music, which stretch far beyond download sites. Alongside the labels, for instance, retailers and radio stations are suddenly faced with the prospect of hydra-headed competition online. Record companies, meanwhile, are also worried about tethering their artists, who suddenly have the ability to bypass them and reach fans directly via the Web.

Plus, there are hordes of nimble Web upstarts trying to take a slice of every aspect of the business, from familiar brands such as MTVi and RollingStone.com to new names such as Launch Media, musicmaker.com, liquidaudio.com, ARTISTdirect Inc., and Listen.com. Big portals such as Yahoo! Inc. can't be counted out, either. "If you're a student of history, I challenge you to find any revolution that has ever been led by the Establishment," says industry veteran Alvin N. Teller, now chairman of a Web-based alternative label, Atomic Pop. Then there's the 800-pound digital-music gorilla--a hybrid of old and new--is about to enter the mix with the planned combination of America Online Inc. and Time Warner, plus the proposed merger of Britain's EMI Group with Warner Music Group.

As scary as all this sounds for music's big players, the digital era should actually bring more good news for them than bad. Indeed, unless they blow it badly, over the next few years the music majors should begin to resemble the big U.S. television networks in the 1980s: Even as their audiences are chipped away by niche rivals, renegade artists, and free downloads, they alone will have the financial and promotional clout to enable stars from Macy Gray to Yo Yo Ma and myriad wannabes to reach mass audiences.BIG GIVEAWAY. What's more, the Web will allow the labels to market their talent in remarkable new ways while also using the medium to reap huge savings on everything from the production of CDs to the millions wasted on marketing new releases that don't succeed. Just as NBC spawned cable channels CNBC and MSNBC, and ABC teamed with sports channel ESPN, the big music "networks" should be able to not only find more buyers for their music but also to tap into new revenue streams such as advertising and e-commerce that until now have been strictly the domain of radio and retail. "There will be lots of different business models out there," argues Richard Bressler, chairman of Time Warner Digital Media.

For now, the music industry has a short window--a few years, perhaps--to revamp the way it makes money. After all, the Web today is one big giveaway, with everything from free newspaper and magazine content to below-cost books and airline tickets on offer in a fevered quest to build online audiences. One likely model to emerge: a subscription service, through which consumers pay fees to receive not only all the music they want but also premium services, be they tickets to concerts--live or "streaming" via the Web--memorabilia, or bonus songs. Look no further than matchbox twenty's new release for a glimpse at the future, especially once AOL and Time Warner are one. Embedded in each mad season disk are custom versions of AOL's Winamp downloading software and its Spinner streaming-media service. Buyers of the CD who pop them in their computers get access to a bonus video of a matchbox performance in Australia and a radio channel programmed by the band. "We've done promotions before, but never anything like this," says Josh M. Selser, general manager of Spinner and Winamp's parent, Nullsoft--all AOL units.SKETCHY PLANS. That's the promotional end. The next--and biggest--step is changing the way people buy their music. Grudgingly, the record companies are coming on board, with sketchy plans like the May 4 announcement from Universal and Sony that they intend to jointly develop subscription services for audio and video music. Another likely new direction for the industry: pushing singles online, ultimately moving to a model where one-hit wonders can get contracts for a single song (and be proud of it) and downloads can be sold at palatable prices of 75 cents or 99 cents a pop.

Right now, singles account for only 7% of music sold. And, at the outset, industry executives expect to sell downloads of singles for $3.50 or so a pop--hardly a bargain. Why so much? In order to gear up for digital downloads, the labels say they have to invest heavily in technology and complicated encryption systems. These will allow buyers of downloads to make copies of their tunes for the "personal use" allowed by law, but they won't be able to turn around and post them back on the Web for the world to rip off. Says Al Smith, senior-vice-president at Sony Music Entertainment Inc.: "It isn't a cheap format."

There's no question the digital transition could cost the music industry in the short run. Today, it's a $40 billion global business in retail sales alone, with a U.S. market of some $15 billion. Music television, fan magazines, and radio generated an additional $16.7 billion in revenue in the U.S. in 1998, according to MTVi Group Inc., Viacom Inc.'s Web unit. That's not even counting concert sales, artists' merchandise, and sponsorships. The big question is whether the labels, retailers, and radio operators can stop warring against college kids, technology, and each other long enough to start embracing the new world order and reaping the benefits in the long term.

So far, there's plenty of friction. Music labels are afraid of annoying retailers, which for the foreseeable future will remain the dominant distributors of music. And they must continue to play ball with radio, still the primary promotional venue for the moment. It's also far from clear, despite industry efforts to develop encryption technologies, how secure copyright protection will be in the digital domain. Moreover, music has for decades been a slow-growth industry, growing at an unremarkable 3% to 6% in the past few years. "The future is theirs to lose," says Michael C. Nathanson, a music-industry analyst at Sanford C. Bernstein & Co. "The more people explore free music on the Web, the harder it's going to be to go back [to buying it]."

Here's what the industry has to contend with: Spend any time with Net-savvy, music-loving kids, and it's easy to see that freely downloading music has, for some, become as routine as flicking on the TV. Jesse, a 13-year-old Montclair (N.J.) seventh-grader and aspiring jazz musician, has so far downloaded 330 tracks via Napster. "If I find something I like, I tell my friends: `Download this, it's a really good song,"' says Jesse, whose surname is omitted because such downloads are illegal.TIP OF THE ICEBERG. For Jeffrey, a soft-spoken 14-year-old in a small town outside Boston, sites such as Napster may get a lot of attention, but they tend to provide free access to only two or three songs from an album. His preferred place to go to download entire albums is--surprise!--an obscure corner of AOL. With 24 million subscribers, AOL is the place where some half of all people online in the U.S. go to access the Web while also using its services such as e-mail and chat rooms. Logging into an AOL chat room called cerver2, Jeffrey shows how someone nicknamed BuDDah NEmpr3ss is offering, in what looks like an alien language, access to a server he has loaded with free tunes to download. (A typical line of "chat" goes like this: "*** Ying Yang??? AoL4.0 Server by sgto 3 list(s) ***1316.") A quick exchange with BuDDah (translation by Jeffrey) yields four messages sent to my e-mail address listing hundreds of tracks for download--from Christina Aguilera's entire chart-topping album to Eddie Murphy's comedy specials--and a link to his server. "If I need a single song, I just use Napster--it's faster," explains Jeffrey. "But on AOL, you can download your whole list overnight." An AOL spokesman says only that "AOL doesn't monitor its chat rooms but responds to legitimate outside complaints."

These examples are only the tip of the iceberg. Places such as Hotline.com and OTH.net offer thousands of other musical choices. And in March, AOL caused a stir when programmers in its Nullsoft unit released what it later called an "unauthorized" program for trading music called Gnutella. AOL disassociated itself with Gnutella, but it has been spreading across the Web.

No wonder music industry veterans are reeling. But they also know that changes in technology have spelled windfall for the industry before. The switch to CDs from vinyl in the 1980s allowed music companies to re-release the entire history of music with minimal production costs. With the Net, the payoff could be all the more staggering. As more and more people come online, new ways of selling and packaging music--and using the Web for marketing--should mean a boon for the labels and radio, better terms for artists, and a consumer paradise. Val Azzoli, co-CEO and co-chairman of Atlantic Recording Corp., is most excited by the prospect of improving his hit ratio by using the Web to test-market new songs and weed out new acts. "I want to be able to pull the plug at $300,000 rather than $1 million," says Azzoli. "That's a huge benefit."

Already, some labels and Web-only outfits are starting to offer digital downloads for sale over the Web, or even in music stores, so that no album is out of stock. And a whole new generation of portable music-playing gizmos from wristbands to cell phones that use wafer-size storage devices for downloading is taking hold in Japan and will soon expand overseas (page 132). In Europe, Bertelsmann and an unnamed Italian financial backer are trying to take Europe's lead in using mobile phones as a wireless music channel. In Italy at the end of May, they will launch TJ Net, which will allow Italians, already heavy users of mobile phones, to download music to newfangled handsets. Says Strauss Zelnick, chief executive of BMG Entertainment, Bertelsmann's music unit: "The legitimate music market is going to double or even triple in the next 10 years."

If that holds true, the question is: Who will grab the biggest piece? For artists, the Internet has turned music-business traditions on their head. A small but significant group of artists, from David Bowie to rapper and producer Chuck D to singer Aimee Mann is using the Web to bypass the labels and go straight to their fans. "What you'll see in the near future is a million artists and about 500,000 labels, and many artists becoming their own labels," predicts Chuck D. "The whole album paradigm will be redefined. It will be a singles marketplace, and it will be shared by a million hands."

At the same time, look for contracts between talent and labels to change. Consider the recent deal the artist known as The Artist (who once was called Prince) cut with BMG's label. After a string of self-released CDs via the Web--none of which was a mainstream hit--The Artist signed a one-album deal for his recent rave un2 the joy fantastic that gave him control of his original recordings, along with a richer cut of profits. "My arrangement with Arista is a landmark because it is nonrestrictive," The Artist says via fax. No fan of the big labels, he adds: "The word CONtract means 2 make smaller." But for every artist such as The Artist or Chuck D, there are a dozen hot new acts that would rather get a big fat check, slip into a limo, and worry about it later than become an entrepreneur.

Similarly, the new world of downloads isn't a death sentence for the labels. Clearly, free sampling has become an integral part of the music business. Bootleg recordings of live shows from hot acts have always been a way to spread word of mouth, and piracy has taken a big chunk of the media landscape for years.

The music business already loses as much as a third of its worldwide volume in units to pirated copies, particularly in markets such as Russia and China. But how far will it go? Where industry execs draw the line is the legitimization of central places to exchange music online where no one in the industry--not writers, artists, nor their labels--gets paid. "One-to-one transmission [of songs] is unnerving but not disastrous," says Recording Industry Association of America President Hilary B. Rosen. "The problem is when you have significant facilitation and high customer service in things such as Napster or Gnutella."

Judgments such as the one against MP3.com will help the record companies stave off change for a little while. But there's no doubt that whatever encryption technology the industry uses to protect the copyright on downloads will be successfully hacked. Ultimately, the only real chance will be adopting new business models based on lower prices but greater sales and new forms of packaging such as online subscriptions. After all, says BMG's Zelnick, "most people don't like to steal."

But even a brave new music world is not without its perils. With the pending AOL/Time Warner/EMI combo, some industry execs wonder if the behemoth will undermine the industry's new model. The worry is that music could end up being sold below cost as part of AOL's Internet service package, since music will account for less than 10% of AOL/Time Warner's overall revenues. "Music will not be a loss leader," scoffs Time Warner President Richard D. Parsons, who will oversee music for the combined company. "This is a big business we're talking about."

Making it an even bigger business bodes well for artists, labels, and Web upstarts alike. But the industry has to pick up the beat when it comes to the oldest adage in the biz: giving the people what they want. Even though Bent wasn't released as a single, it was up on the Web and available by download within three days of hitting the radio waves. Not surprisingly, it was also being given away as a free download as part of AOL's "artist of the month" promotion for May. That's why the record-industry associations and individual groups such as Metallica are launching what amount to public lobbying campaigns to appeal to fans to cut it out--at least until the majors figure out how to implement their own download schemes.

That's a risky move, considering how much of music is tied to the counterculture. But even hipsters can't escape from the harsh commercial reality of the new digital era. "It sounds selfish, but it's just business," says singer Thomas. "We always felt that as musicians, we would give it away so long as we can pay our bills. But are we not going to get an honest day's pay for an honest day's work?" Only if the music industry can get its acts together--literally and figuratively--will the answer be yes.By Richard Siklos in New York, with Steven V. Brull in Los Angeles and Bureau ReportsReturn to top